How to limit audit risk

Auditors are paid to complete a job that gives peace of mind to a firm’s investors but sometimes an unqualified audit report or an incorrect opinion on a financial statement, called an audit risk, can lead to misleading report but there are steps that can be taken to mitigate this.

Audit risk calculation

The audit risk calculation is Inherent Risk x Control Risk x Detection Risk, which means that audit risk is the product of various other risks which are tackled during the audit. The auditor has a responsibility to keep the overall risk down to an acceptable level so each component has to be properly assessed.

Components

There are three elements of risk, all of which are equally important. Inherent Risk refers to material misstatements in the financial statement appearing because of omission or error. This sort of mistake is often higher when the auditor has to include a great degree of his own judgment or when audits are carried out on highly complicated transactions. This sort of risk is often found in new businesses or those involved in emerging industries that the auditor doesn’t have much experience of.

Control risk

This is a mistake occurring in the final report brought about by a failure of the firm’s internal processes. If the company being audited doesn’t have adequate controls in place then fraud or errors could take place. This is normally a problem with small businesses who rely too much on individual’s competencies rather than proper management processes, or firms who don’t have properly trained workers preparing their financial and accounting statements.

Detection risk

The final type of risk comes down to the auditors themselves. They have to use proper procedures and shouldn’t cut corners by not examining enough transactions or by not reviewing transactions over a satisfactory timescale.

Final word

There are controls that the company’s owner or MD can carry out to make sure that audit risk is limited and there are also responsibilities for the auditors carrying out the audit. Audit risk can’t be eliminated totally, but it can be limited if these controls and procedures are undertaken.